JPMorgan on Copom: BCB To Maintain Tightening At Same Pace

JPMorgan on Copom: BCB To Maintain Tightening At Same Pace Until There Is Sufficient Confidence That Prospective Inflation Is Moving Toward The Target

• Continue to expect a 100bp hike at this week's COPOM meeting, a call they have held since the last meeting, in line with the consensus of economists and below the market pricing that currently seems divided between 100bp and 125bp at this moment.
• Given the remaining uncertainties in a context of re-normalization of the global economy, as well as the lags of monetary policy and higher inflation expectations, this already aggressive and vigorous 100bp pace seems appropriate.
• Expect the monetary authority to maintain the 100bp tightening pace in October and December, followed by a final 75bp increase in February 2022. This path would leave the terminal rate at 9%, the highest nominal policy rate since the end of 2017.
• In an environment of rising inflation and inflation expectations, JPM also expect the BCB will adopt a more hawkish tone. They believe that BCB will suggest it is appropriate to raise interest rates "significantly above neutral" and that it most likely will continue at its current pace of adjustment in the next meeting.
• JPM don't think the recent decline in GDP growth expectations will significantly affect the central bank's decisions either. The shift is a result of the expected monetary tightening—with the SELIC at a restrictive level to lower inflation—the recent fiscal and political turbulence, which can also generate further inflationary pressures, and the risks of a deterioration in the water crisis, a supply shock.